Here's what to consider about financially helping adult children | Loy

The mindset we bring to our finances depend on various factors. A single person does not financially plan the same as a person who has children. When one becomes a parent, we often prioritize our children’s future before our own. Situations and relationships change and thus, a financial plan for the future should change as well. There are several factors to take into consideration when your child is in a life transition; where learning how to manage money can become a challenge, if you are not both financially prepared.

Picture that your daughter is a sophomore in college. She’s decided that she’s going to move out of the dorms and is going to pursue off-campus housing. Do you assist her with housing by co-signing an apartment lease, or possibly invest in a house or duplex that can be rented to her and her friends? What if your child is not attending college or has already graduated but needs assistance in buying a home? Do you help them make a down payment or co-sign the mortgage? What if you served as banker and they made the monthly mortgage payments to you?

Young adults may need financial help with their housing – down payment, co-ownership, financing the purchase, or qualifying as a lessee or borrower – and depending on your finances, you may have the fortunate position of being able to assist them. However, you should take into consideration that there are rewards and risks that come with it. Although you may want to help your child, you and/or your partner need to consider all the factors.

Here are important planning considerations regarding family real estate investing:

The upsides

Financially assisting your children has many rewarding benefits for both parties. Benefit to your children includes helping them build good credit history, teaching them to be financially savvy and responsible. You will help them experience the pride of home ownership and the safety and comfort of a good roof over their heads. As a parent you may get the satisfaction of assisting your children, transferring wealth while you’re alive and even have the possibility of a good investment opportunity.

The downsides

The downsides of financially assisting your children when they become young adults can be categorized into three broad areas – not holding up one’s end of the bargain (e.g. late payments, care and maintenance, etc.), adverse real estate market conditions and extraneous forces (e.g. job change, fire or casualty, legal actions, etc.). These downsides can negatively affect either of you and should be considered before making a decision.

Tax issues

There are two issues you should consider before financially assisting your child which are gift and income taxes. Currently, you can annually gift $15,000 per person – free of gift tax. This means two parents can give a total of $30,000 to a child without incurring a gift tax. Additionally, if you’re gifting funds for a down payment on a house, you may need gift tax returns and/or gift letters. Lenders may want to track and source funds and hence, the need for a gift letter. Monetary gifts in excess of that amount could be subject to gift tax. However, keep in mind that you may utilize up to an $11.4 million lifetime gift exemption. Also, the Internal Revenue Service (IRS) can view a home in three ways – residence, vacation home or rental property. Rent received is generally income but the deductibility of expenses varies depending on how the property is treated and circumstances.

Emotional considerations

Throughout this entire process, the main goal is to maintain harmony in the family. Financial entanglements can cause stress or unnecessary problems in a relationship. Remember the potential of “blood is thicker than water until it comes to money.” If you have more than one child, something you should consider is the issue of fairness amongst your children. Be aware of conditions being construed as “strings attached,” or resentment of putting your retirement on hold or trimming your lifestyle. And are you prepared to act decisively if a contract is breached?

With all these tips in mind to make the right financial move, always remember to talk it out and put it in writing. Have a discussion with your child about your expectations and concerns. Talk about risks and how they should be managed. Also, when you write out your plan, it becomes a business agreement with terms, conditions and consequences. It’s also important to get your advisors involved – they can help you think things through and help put things in your favor. Make it a valuable and cherished experience for your family without compromising your retirement or relationships.

Secure your future wisely.

Brian Loy, CFA, CFP, is president of Reno-based Sage Financial Advisors Inc. Contact him at www.sagefinancialadvisors.com or business@rgj.com.